Key facts
- The euro rebounded on Tuesday, poised for its strongest move higher in seven weeks.
- French 10-year bond yields fell 11.4 basis points to 4.7506%.
- The euro zone's currency jumped 0.35% to $1.126.
- The dollar index fell 0.32% to 101.83.
- The Bank of Japan may signal this month that underlying inflation has roughly hit its 2% target.
- The dollar rose 0.11% against the yen to 158.08.
The euro rebounded on Tuesday, poised for its strongest move higher in seven weeks, after a pullback in French government bond yields eased fears about strain in euro zone debt markets. The euro zone's currency jumped 0.35% to $1.126, on track for its biggest daily gain since August 19. It had fallen to a 17-month low of $1.116 on Monday.
The dollar index, which measures the greenback against a basket of currencies, fell 0.32% to 101.83 and was on pace for its biggest daily drop since September 3. Bond markets globally have seen yields climb recently due to expectations of central bank rate hikes, stoked inflation from rising energy prices due to the Iran war, and concerns about government finances.
French debt has faced pressure as politicians struggle to curb the budget deficit ahead of a 2027 election. A snap election in Spain also added to recent pressure on the euro. An early drop in energy prices helped French bonds rally on Tuesday, with the key 10-year yield down 11.4 basis points at 4.7506%. Crude prices had fallen as rising Middle Eastern crude exports and a G7 emergency stockpile release eased supply concerns, though prices had since rebounded.
"Saudi-backed Yemen forces have recaptured some strategic territory from the Houthis, this has seen oil prices drop sharply," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York. "In turn, this has helped drag yields down, including in France, and in Italy, where the spreads had really widened lately and so this is giving the euro a bit of a bounce."
Marine Le Pen, a far-right French presidential candidate, increased her plans to reduce spending to €140 billion ($158 billion) from €125 billion in savings originally planned if she wins power in 2027.
The fall in the dollar helped buoy other currencies, with sterling up 0.42% and on pace for its biggest daily gain since August 19, to $1.3275.
The yen was an exception, with the dollar up 0.11% to 158.08 against the Japanese currency. The Bank of Japan may signal this month that underlying inflation has roughly hit its 2% target, three people familiar with its thinking said, highlighting its readiness to raise interest rates again in the coming months. Bank of Japan Governor Kazuo Ueda said it was becoming more important to anchor underlying inflation around the central bank's 2% target, signaling a preparedness to keep raising interest rates to blunt the risk of too-high inflation.
The US dollar's recent strength has come even as expectations for a Federal Reserve rate hike at the central bank's policy meeting later this month have retreated in the wake of weaker-than-expected US jobs data and comments from some Fed officials. However, markets are still anticipating more rate hikes later in the year and next year. Goldman Sachs analysts said in a note that the dollar's September gains were partly due to the greater exposure of US equities to technology and AI, along with the recent outperformance of US growth. But the firm is cautious on the prospects for near-term dollar strength, citing stretched positioning in several major pairs and the recent Fed communication emphasizing a patient approach to policy tightening.
In contrast to the recent call for patience from some Fed officials, Kansas City Fed President Jeff Schmid said on Tuesday that the central bank still needs to raise its policy rate further to lower inflation, even if.